Dubai Group restarts $10 billion debt talks: sources

David French, Mirna Sleiman

5 IN. DI LETTURA

DUBAI (Reuters) - Dubai Group, part of the investment vehicle headed by Dubai’s ruler, has proposed a new solution to its $10 billion debt problem, sources said, reviving talks that stalled more than two months ago.

Sheikh Mohammed bin Rashid Al Maktoum, vice president of the UAE and ruler of Dubai, is seen after the opening session of the World Economic Forum (Summit on the Global Agenda) in Abu Dhabi October 10, 2011. REUTERS/Jumana El Heloueh

The company wants to pay as little as 1 percent interest for an extension of its debt of up to 12 years, sources told Reuters on Thursday.

The proposal, sent to lenders on the two creditor committees earlier this week and which will be put to all banks at a meeting on April 16, is the first time Dubai Group has offered a solution since the government walked away from talks at the end of January.

However it is unlikely this opening salvo in the new round of negotiations will yield an agreement, the sources said.

“The fact is this will be met with a lot of resistance and it is very unlikely that something that looks like this will be acceptable to the creditor group,” one source said, speaking on condition of anonymity.

Under the plan put forward by Dubai Group, a unit of Dubai Holding DUBAH.UL, the personal investment vehicle of Sheikh Mohammed bin Rashid Al Maktoum, lenders will be offered new terms based upon the level of security they currently hold. Those with assets backing their claims will be offered a better deal.

Proposed tenors run from 3.5 years - for lenders holding debt in the $330 million syndicated loan backed by a stake in Malaysia’s Bank Islam - up to 12 years for unsecured creditors, the source said.

Proposed interest rates on the debt will start at 1 percent for unsecured creditors and increase incrementally for those with assets against their claim, two sources said - although the higher interest rates are still regarded as low.

Accepting a nominal interest rate for such a long tenor extension would be unattractive for lenders, said a source at an international accountancy firm, as it would effectively mean taking a loss on their capital.

“Although the lenders aren’t giving up any of the principle amount lent - i.e. what is typically referred to as a haircut - the interest received is likely to be below their own cost of capital, meaning they would make a loss,” he said.

“Under accounting rules, the bank would have to recognize the losses associated with this ‘loss-making contract’ when the loan commences, leading to an up-front writedown on the loan.”

Dubai Group holds mainly financial assets including stakes in Egyptian brokerage EFG Hermes (HRHO.CA) and Cyprus’ Marfin Popular Bank (MRFr.AT). It also has some real estate and said in March it was weighing the sale of the Jumeirah Essex House hotel in Manhattan.

A spokeswoman for Dubai Group declined to comment.

CREDITOR DIFFERENCES COMPLICATE

Though the overall package is $10 billion, the focus of Monday’s talks will be on the $6 billion of bank debt, with the remaining $4 billion being inter-company loans the firm has agreed to rank subordinate to cash owed to lenders.

Dubai Group missed two loan payments in the latter part of 2010 and its workout is complicated by the fact it has both secured and unsecured creditors, meaning lenders have been jostling among themselves to protect their positions.

Other Dubai government-related entities which had a single class of creditor have secured restructuring agreements, such as Dubai World and Dubai International Capital, which announced a $2.5 billion debt deal at the start of April.

The 44-member bank group of secured and unsecured creditors consists mostly of lenders based in the Gulf and Egypt but also includes Royal Bank of Scotland (RBS.L) and Natixis (CNAT.PA).

Dubai’s Supreme Fiscal Committee, which supervised Dubai World’s $25 billion restructuring, ended its involvement with Dubai Group earlier this year, leaving the firm to deal directly with creditors and dashing hopes of a state-backed rescue.

The unsecured creditors had demanded $2 billion in financial support - including a backstop guarantee of $1.8 billion from the Dubai government - in a letter sent to the firm in December.

Creditors have insisted government support is essential to any deal because the firm’s financial position — limited cash flow and assets with sharply reduced values — raised the considerable risk of default on a renegotiated structure.

However, Dubai has distanced itself from government-related entities since Dubai World’s problems, insisting the firms operate independently. While Dubai Holding is Sheikh Mohammed’s investment vehicle, he is not involved in everyday decision-making.

Dubai Group has not paid interest on its debt since August 2010, with the amount outstanding likely to top $1 billion by the time any deal is reached, sources told Reuters in November.

The firm said at the time it would roll interest payments into the principal owed.